Sunday, October 04, 2009

Never watch hamburgers or legislation being made

A very disturbing article in today's New York Times retraces the path of contaminated ground beef that left a woman paralyzed after a severe E. Coli infection in 2007. Ground beef in a single patty could use material from several different suppliers and could pick up contamination from dozens of places along the way, subject to minimal inspection. The scariest news: many slaughterhouses insist that the meatpackers they sell to may not inspect the beef they send. For example, a spokesman for Costco says that Tyson will not ship ground beef to Costco because Costco insists on testing all incoming shipments for pathogens, and Tyson does not allow any of its customers to test for pathogens. This is legal?

This also illustrates a current issue in financial regulation - conflicting responsibilities within a regulatory agency. The Food and Drug Administration (FDA) regulates food safety for most foods and has the expertise to regulate food safety in meat products if allowed to do so. But meat is regulated by the US Department of Agriculture (USDA). The FDA has one mission with regard to food - ensure food safety. The USDA's primary mission is to promote agriculture and American agricultural products. Of course Congress could move enforcement to the FDA if it so chose, but agriculture defenders in Congress would not let that happen.

Which brings us to financial services regulation. The Federal Reserve is like the USDA. Their primary regulatory mission is to ensure the safety of the US financial system, which means protecting the safety of financial institutions. For example, with many large banks currently undercapitalized, any practices by banks to aggressively generate fees from checking accounts and credit card accounts add to the banks' bottom lines and help the banks to recover more quickly. The Fed recently proposed rules to limit some of the most egregious bank practices. The Fed is only offering these proposed rules because they are required to do so to implement regulations recently passed by Congress. The Fed has had the power to ban misleading financial products, but has not taken this particular action until directed by Congress.

A Consumer Financial Protection Agency (CFPA) would take responsibility for regulating the specific consumer products banks issue, such as credit cards. The CFPA would have to approve the terms of credit card contracts to make more apparent the costs that banks try to hide. Similarly, the CFPA would regulate terms on checking account fees, mortgages, and other products.

Baseline Scenario, citing a study by Adam Levitin at the Pew Financial Reform Project, makes the case for the CFPA.

The New York Times and Ezra Klein have articles on recent developments in gaining passage of CFPA legislation through Congress, particularly about how the proposed CFPA is being weakened in order to garner more congressional support.